This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

November 3, 2014

Government Intervention & The End of QE

October wraps up the
Federal Reserve bond-buying program known as quantitative easing (QE). For all
of you definition hungry readers, QE is when the Fed buys mortgage backed
securities and US Treasury bonds. As the prices for these two components rise, the
interest rates drop and also reduces the accessibility of these bonds in the
market. Therefore, with fewer bonds available, investing focus turns to
alternative assets, like corporate bonds. When investors buy corporate bonds,
they are in lending money to businesses, and in turn encouraging economic
activity. In other words, QE was a last ditch effort response by the Fed in the
face of the financial crisis. So, did government intervention in the form of QE
work in rescuing the United States out of the depths of the rescission?

As we know from Mises and the like,
one of the cardinal sins of economic policy is government intervention in the
form of printing money since it ultimately leads to hyperinflation. In order to
answer the above question lets look at the facts we know. Because of QE, interest
rates at near zero percent, which has caused checking, savings and CD accounts to
become stagnant, in other words, it cost money to hold money so regular
Americans are being punished for being risk averse. The trend of increased risk
in the market appears more global then local given the rise of almost reckless
investing of junk bunds or emerging markets. This tendency to take risk forces
us to ask if QE has paved the way for a future financial crisis, likely one
where inflation is rampant. If this is the case, then it’s safe to say that QE
was a failure, and it further proves that government intervention is the worse
form of intervention. But what if we took the idea of success or failure in
regards to QE a step further and instead asked, would QE work for any other country
facing a financial crisis?

The long and short answer seems to
be no. A quick Google search will prove that when the European Union tried
similar QE efforts, they quickly found out they were not the US and as such US monetary
policies did not fit their fiscal needs. Then again, QE may only work because
of the first mover advantage (first to market gains control of resources that
can’t be matched by others), which in this case is the US, and now other
central banks can’t match its effectiveness. Or maybe the success of QE hinges
on a collective psychological acceptance as a functional policy measure rather
then dangerous government intervention. QE is less then a decade old, even
though the bond buying has ended the future effects of the policy are still
largely unknown.

Proponents of QE will argue that
the policy was a success, and further cite that because of QE the US financial
market is on the rebound with stock market hitting record highs, unemployment
falling below six percent and maintained state of low inflation. Mises argued
and proved that unregulated printing of money will lead to hyperinflation, yet
he never put a time frame on when this event would happen, thus it is possible
that tomorrow, next month or next year prices maybe skyrocket. Therefore, to
answer the question if quantitative easing and government intervention worked
yields the answer that it is still to early to tell.